OFFSHORE - A RISK MANAGEMENT TOOL

Our last Newsletter answered the question, what quality attributes are essential when planning for offshore, and provided some insightful thoughts into what to demand from your professional team. There are another sixty or more offshore planning and asset protection related articles found at this link, if you're interested in learning more.

Today’s newsletter takes another look at various financial risks at home and addresses the question:

Is 'Offshore' a Risk Management Tool?

If you're considering 'going offshore' for investment diversification, asset protection, or broadening your business opportunities, it's useful to remember that risk is always relative. Jumping out the second story of your home is certainly high on the risk scale, but if your home is on fire and you can’t get out any other way, the two-story jump is a lot less risky than staying in the house.

Let’s first look at a few of the reasons why increasingly more individuals diversify at least a portion of their assets offshore.

First, there is an ongoing hot debate between those who believe there is ‘no place like home’ and those who believe their homeland is increasingly becoming a police state in which traditional liberties are being circumvented by a host of new draconian laws.

On the one hand, western democracies still offer many economic and personal benefits not readily available around the world. The U.S. in particular still has the largest economy in the world with freedom to choose career paths and work towards financial independence.

But there continues a growing cancer in the body politics and social norms lead by the American government that many fear are irreversible.

First the ‘war on drugs’ led to the creation of a curious felony known as money laundering. While this law was created on the pretext that it would hurt the drug dealers, it became a huge trap for innocent people diversifying assets who have no ties to any form of criminal activity.

Another casualty to our natural rights and freedoms is the right to be secure in the movement and possession of our property. For U.S. citizens, a special protection is supposedly found in the Fourth Amendment to the U.S. Constitution. Unfortunately, today nearly any U.S. government agent or police officer can accuse you of a crime and then proceed to confiscate your property even if it is only remotely connected to the alleged crime. Abuses of asset forfeiture laws in the U.S. are becoming legendary.

The many different government levels raise revenues from asset forfeitures, which has become a substitute for a decrease in tax revenue to pay for the law enforcement activities. As a result, law enforcement personnel are left to their own devices to create 'opportunities' for forfeitures to meet their growing budgets.

To make matters worse, privacy and securing today is all but non-existent. It's not just hackers to worry about, but the government snoopers, and now your neighbors with remote controlled drones watching, listening, and reading your every private move. But our recent newsletter Keeping Private Bits Private' pointed out how we legally preserve the privacy and confidentiality of our client's personal matters, found here.

Today, Americans who are financially successful are not safe or secure in their possessions for many other reasons, including a burdensome level of taxation and concerns of confiscation of personal assets. But Canadians, Australians and Europeans cannot take much relief since they are traveling down the same path.

In America, the top 10% of the income earners already pay more than 50% of the total individual income tax; meanwhile, the bottom 50% pay virtually no income taxes. The tax system increasingly penalizes those that earn, save and invest, and awards those that don't. That's not the America I grew up to know.

And another concern is the risk of currency controls.

Historically, this has always been a a risk, and presently exists today in varying degrees in numerous countries. Yes, even the U.S., Canada, Australia or Europe could establish currency controls tomorrow and prohibit citizens from taking any assets out of the country…. there is an abundance of history that teaches this hard lesson.

For example, Nazi Germany, South Africa and Russia are all the best (or worse) recent examples of currency controls restricting citizens from leaving the country with local currency.

I personally have friends from South Africa that are honest, hard working business people who resettled elsewhere that have shared their personal stories with me of their nightmares as they tried to expatriate their assets outside of their country during strict currency controls .... depressing tales indeed.

And too, I have a long time client who was a well-know actress married to a famous Russian composer that shared their story as they tried to depart from Russia with their hard-earned assets. Sad to say, I had an expat friend that committed suicide over the prospect of losing everything and the fear of starting over again in his late 50s.

These above examples of currency controls are as recent as only the 1990s.

Today in China – the global economic steam engine - its citizens and foreign investors are hindered by strict currency prohibitions when looking to move funds offshore. The government holds a heavy hand over foreign exchange mechanisms and exchange rate controls.

What’s more, we have all heard the horror stories from the 1930s and 1940s as people fled Germany and Eastern Europe with what little they had as they desperately tried to save themselves from tyrants.

The bottom line is that as a good student of history, take the issue of currency controls seriously and as a realistic event that could occur anywhere, at any time, including in the U.S., U.K., Australia or Europe.

Having at least a portion of your assets offshore is an excellent starting point for risk management.

In each of the above examples, those individuals that had pre-planning strategies, and holding and controlling their assets titled in an offshore structure, did not have the concerns of the average person who failed to take the same steps. Repeatedly they learned how an international trust is an excellent risk management tool, and you can learn more here.

If history is our teacher, and if we learn well, I can see no better way to protect assets than titling them in an offshore international trust structure. You can then keep the assets offshore, or right at home with an exist strategy in place.

And there are many more reasons and superior benefits in maintaining at least a portion of your assets offshore.

Putting all of your eggs in one basket poses great risk for those who fail to actively devote their time to managing their investment portfolio. The solution is diversification, another example of risk management. There are an overwhelming number of choices available outside your backyard, just 'offshore'.

And too, there are other types of risks known as 'liquidity risks', that is, a risk associated with not being able to gain immediate access to your money or obtain its reasonable value when needed. Therefore, your assets should be spread across a broad band of assets, in different countries, and best yet, in different currencies.

Do you think that depositing your savings in your hometown bank is really safer than 'offshore'? Think again.

Surprising to most Americans is the fact that many of the major international banks and insurance companies operating offshore are far more conservative in managing their portfolios, and far less susceptible to failure than U.S. financial institutions. As noted here, there are some sound strategies in reducing your banking risks at home, but U.S. banks are still riskier than most realize. Many banks located “offshore” are highly rated investment quality at AAA and AA, ratings that many of the best U.S. banks could never achieve, as noted here.

Why are most U.S. banks rated lower that many offshore banks?

Because offshore banks are generally not propped up by government-backed insurance to protect their depositors and must conduct their affairs with fiscal responsibility. By comparison, U.S. banks and financial institutions are far more leveraged than many offshore financial institutions. If the U.S. suffered a run against deposits – as happened in the 1930s and in small numbers in 2007 & 2008 – there would be great risk to the entire banking system, which could cause the entire system to fail. Do not view this long list of bank runs if you do not have a strong heart.

Prudent and conservative investors therefore place at least a portion of their funds outside their home banking system.

Today, another significant reason for moving part of your cash offshore is the loss of financial privacy. Increasingly, we have become a transparent society, and this includes our financial affairs.

What’s more, I personally believe that one of the major reasons for placing some funds outside of your home country is due to the ongoing litigation epidemic. Once upon a time this was a primary reason for offshore planning, but has been preempted by government snooping, concerns of confiscation, and currency controls.

Litigation-gone-wild first started in the U.S., most notably during the 1980s, worsened during the 1990s, and still continues to grower bleaker every year. I first wrote at length about the U.S. litigation problem and the need to seek offshore asset protection in How to Legally Protect Your Assets in 1999. The book grew out of years of litigation experience as a former judge and being named a Top 100 Trial Lawyer where I witnessed first hand asset protection plans that worked, and others that failed. A recent second edition followed, as found here.

A significant reason for the flight of large amounts of assets moving offshore is the growing, crazy, litigious attitude and obnoxious awards granted by juries and judges. I can attest to the ridiculous claims and results that too frequently arise from the U.S. judicial system, and it has already spilled over into other venues.

Think insurance will set you free? Think again.

Even insurance has limited benefits, since the insurance companies often badger their insured to settle to avoid a trial…. even with the most frivolous of lawsuits. Or a claim might not be covered; or there could be excess liability; or worse yet, insurance companies can, and do, go bankrupt.

And the litigation prospects for Canada, Australia, New Zealand and Europe aren’t too much better than the U.S. as I see the same themes developing in these countries today that I first witnessed in the U.S. during the 1980s and 1990s. Sad, indeed.

Our Western Culture has become a financially cannibalistic society where we compete in the legal and political arenas for the power to impose our wills and policies on others. Those who mind their own business, put their nose to the grindstone and are thrifty, too often find themselves unsuspectedly on the short end of the deal.

The hard-working individuals who have accumulated some assets - or who have become financially independent - need to set aside at least a small nest-egg offshore, where it will be safe from the litigation parasites and politically-connected vultures in our society.

To be forewarned is to be forearmed.

The case for using an international trust for risk management is stronger today than ever before. And as the barriers at the borders continue to become increasingly restrictive against the free movement of people and property, going offshore provides an opportunity to broaden your horizons and better manage risks.

Managing risks using offshore planning techniques is just one of the many topics discussed in Offshore Living and Investing, 2nd edition, … in case you are interested in learning more. Or drop me an email here, if you want to begin with your own plan.

Until next time, remember, if you have something worth protecting, take steps today…. before it’s too late.

(Licensed to Practice Law in U.S. States & Federal Courts;
Assoc. Member Auckland, N.Z. District Law Society - Foreign Lawyer; &

Assoc. Member Queensland Law Society, AU - Foreign Lawyer)

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